The Economic rationale behind spinoffs

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Firms Involved

  • Alibaba
  • Yahoo

Year of the event

1998-2016

Description of the case

Long ago, Yahoo bought a 40% participation in a tiny Chinese firm for a modest amount. In 2015, this participation had grown to become larger than the value of Yahoo itself, though Yahoo owned only 20% of Alibaba by then. In fact, in 2015, Yahoo’s core business was worth around $5bn, while its participation in Alibaba was worth circa $40bn. Under the pressure of shareholder activist Starboard Value[1], Yahoo planned to spin off its participation in Alibaba in a new entity, and give the shares to its shareholders. That was a major issue, as the DOJ was looking forward to taxing heavily this transaction[2], which would result in the loss of $16bn (40%). In 2016, Yahoo found another suitable solution: instead of making a spin-off of Alibaba’s shares, Yahoo would sell its core business, and the historic Yahoo would become a shell holding Alibaba Stock as well as various other participations and licenses. The reborn holding entity was named Altaba. The transaction was completed as planned, with Verizon acquiring Yahoo[3] in June 2017. Yahoo, having cleared the shadow of the potential tax payment, appreciated sharply.

Take-aways

  • Spinoff aim at making an entity more valuable by being splitting in two. The discrepancy can come from taxes.
  • Activists target firms with inconsistent structures or large holdings/long term investments/cash.

References

  1. http://businesscycles.eu/tech/cowcot-entreprises-yahoo-contre-les-activistes/ Business Cycles (FR), Yahoo contre les activistes
  2. Bloomberg, Yahoo Would Rather Not Pay Taxes on Its Alibaba Shares
  3. Techcrunch, Verizon buys Yahoo for $4.83 billion